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CHAPTER 2 STRATEGIC HUMAN RESOURCE MANAGEMENT

Chapter Summary
This chapter describes the concept of strategy and develops the strategic management process. The levels of integration between the HRM function and the strategic management process during the strategy formulation stage are then discussed. A number of common strategic models are reviewed and within the context of these models, types of employee skills, behaviors, and attitudes are noted. Ways in which HRM practices aid the firm in implementing its strategic plan are described. Finally, a model that views the HRM function as a separate business within a given firm is presented, making it easier for the student to understand the need for strategic thinking among HRM practitioners.

Learning Objectives
After studying this chapter, the student should be able to:

1. 2. 3. 4. 5.

Describe the differences between strategy formulation and strategy implementation. List the components of the strategic management process. Discuss the role of the HR function in strategy formulation. Describe the linkages between HR and strategy formulation. Discuss the more popular typologies of generic strategies and the various HR practices associated with each. 6. Describe the different HR issues and practices associated with various directional strategies. 7. Discuss the role of HR as a customer service business. 8. List the competencies the HR executive needs to become a strategic partner m the company.

Extended Chapter Outline


Note: Key terms are boldface and are listed in the Chapter Vocabulary section.

Opening Vignette: Strategy and HR at Delta Airlines


This vignette describes the problems Delta is facing with falling stock prices, rising costs, and increasing competition. Ron Allen, CEO of Delta, implemented a program called Leadership 7.5 that cut experienced employees and replaced them with lower paid, inexperienced employees. The conclusion represents implications of poor human resource management. I. IntroductionThe goal of strategic management in an organization is to deploy and allocate resources in ways that provide a competitive advantage. To be maximally effective, the HRM function must be integrally involved in the companys strategic management process. What Is Strategic Management?Strategic Management is a process for analyzing a companys competitive situation, developing the companys strategic goals, and devising a plan of action and allocation of resources (human, organizational, and physical) that will increase the likelihood of achieving those goals. Strategic human resource

II.

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management is the pattern of planned human resource deployments and activities intended to enable an organization to achieve its goals. A. Components of the Strategic Management ProcessThere are two distinct phases of this process (Figure 2.1 in the text and TM2.1). 1. Strategy Formulation: During this phase, strategic planning groups decide on a strategic direction by defining the companys mission and goals, its external opportunities and threats, and its internal strengths and weaknesses. 2. Strategy Implementation: During this phase, the organization follows through on the strategy that has been chosen. This includes structuring the organization, allocating resources, ensuring that the firm has skilled employees in place, and developing reward systems that align employee behavior with the strategic goals. B. Linkage between HR and the Strategic Management Process: The strategic choice really consists of answering questions about competition. These decisions consist of addressing the issues of where to compete, how to compete, and with what to compete (See Figure 2A). C. The Role of HR in Strategy FormulationBoth strategy formulation and strategy implementation involve people-related issues and therefore necessitate the involvement of the HR function. Four levels of integration exist between the HR function and the strategic management function, as shown in Figure 2.3 in the text. 1. Administrative LinkageThis is the lowest level of integration, in which the HRM functions attention is focused on day-to-day activities. No input from the HRM function to the companys strategic plan is given. 2. One-Way LinkageThe firms strategic business planning function develops the plan and then informs the HRM function of the plan. HRM then helps in the implementation. 3. Two-Way LinkageThis linkage allows for consideration of human resource issues during the strategy formulation process. The HRM function is expected to provide input to potential strategic choices and then help implement the chosen option. 4. Integrative LinkageThis is based on continuing, rather than sequential interaction. The HR executive is an integral member of the strategic planning team. (See Table 2.2 in the text for examples of the HR role in strategic planning.)

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Strategy FormulationThis includes five major components (see Figure 2.2 in the text). A. A mission is a statement of the organizations reasons for being; it usually specifies the customers served, the needs satisfied and/or the value received by the customers, and the technology used. B. Goals are what the organization hopes to achieve in the medium- to longterm future; they reflect how the mission will be operationalized.
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C. External analysis consists of examining the organizations operating

environment to identify strategic opportunities and threats. D. Internal analysis attempts to identify the organizations strengths and weaknesses E. Strategic choice is the organizations strategy, which describes the ways the organization will attempt to fulfill its mission and achieve its long term goals.
Example: Delta AirlinesDeltas employees were so loyal to the company that in the 1980s the employees pitched in a bought the airline a new plane. The Leadership 7.5 program arguably got rid of Deltas only competitive advantage. Ideas could have been generated to find a more effective way of cost cutting in an alternative strategy.

Competing by Meeting Stakeholders Needs: Sears Harnesses the Power of People: Faced with mounting losses and characterized by a dinosaur culture, Arthur Martinez took over as the head of the merchandising group at Sears and sought to recreate one of Americas best known institutions. Focusing on understanding how and why its people are its most important asset, Sears spent significant time in the development and communication of learning maps. In addition, Sears set out to change the behavior of leaders through creating a leadership model that integrated the vision and values. The results have been profound.

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Strategy ImplementationFor any strategy to be implemented effectively, certain tasks must be accomplished in pursuit of the companys goals; individuals must possess certain skills to perform those tasks, and these individuals must be motivated to perform them effectively. Five variables determine success in strategy implementation (see Figure 2.4 in the text and TM 2.4). HR has responsibility for three of these: task, people, and reward systems. The role of the HRM function is one of (1) ensuring that the company has the number of appropriately skilled workers and (2) developing control systems that ensure that those employees contribute to goal achievement. This is accomplished through various HR practices (see text Figure 2.5 and TM 2.5). A. HR PracticesThe HR function has six menus of practices from which companies can choose to fit their strategic direction (see Table 2.3 in the text and TM2.6). 1. Job analysis is the process of getting detailed information about jobs. Job design deals with making decisions about what tasks should be grouped into a particular job. Jobs can range from very narrow sets of tasks that demand a limited set of skills to a complex array of tasks that requires multiple, high-level skills. Many jobs today are being broadened.

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2. Recruitment is the process through which the organization seeks applicants for employment. Selection refers to the process of identifying applicants with the appropriate knowledge, skills, and ability to help the company achieve its goals. 3. Frequently, employees need new skills when jobs are modified. Training refers to a planned effort to facilitate learning of job-related knowledge, skills, and behavior. Development involves the acquisition of knowledge, skills, and behavior that improves employees ability to meet the challenges of a variety of existing jobs or jobs that do not yet exist. TQM programs require extensive training of employees. Example: When the Collins & Aiken management made the decision to hook up their carpet tufting and shearing equipment to computers, workers were terrified. More than a third of the plants work force were high-school dropouts. The company spent an average of $1,200 for each workers training, including lost work time. Basic skills, high school equivalency courses, and job specific courses have been taught. Within the tufting operations, productivity has risen 10 percent since 1989. Returns have been cut in half during the same period.

A related readings from Dushkins Annual Editions: Human Resources 99/00 are: Can Generation Xers Be Trained? by Shari Caudron.

4. Performance management is used to ensure that employees activities and outcomes are congruent with the organizations objectives. 5. Pay structure, incentives, and benefits have an important role in implementing strategies. High pay levels help to attract and retain high-quality employees. Performance-based pay plans help motivate appropriate performance. The pay system includes the base pay as well as incentives and benefits. 6. Labor and employee relations refer to the general approach the company takes in interacting with its employees, whether unionized or not. Companies can choose to treat employees as assets, resources to be invested in for the long term.

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Related readings from Dushkins Annual Editions: Human Resources 99/00: Emerging Model for Salary Management by Howard Risher. Labor Deals a New Hand by Marc Cooper.

B. Strategic TypesSeveral different typologies of strategies exist. 1. Porters Generic StrategiesMichael Porter has hypothesized that competitive advantage comes from creating value by (1) reducing costs (overall cost leadership) or (2) charging a premium price for a differentiated product or service (differentiation).

C. HR Needs in Strategic TypesDifferent strategies require different types of employees with different skills and also require employees to exhibit different role behaviors. Role behaviors are the behaviors required of an individual in his or her role as a jobholder in a social work environment. 1. Cost strategy firms seek efficiency and therefore carefully define the skills they need in employees and use worker participation to seek cost-saving ideas. 2. Differentiation firms need creative risk takers.

Competing by Meeting Stakeholders Needs: A Cost Strategy That May Cost Children Their Health In Columbia, the cut flower industry is booming at the expense of child labor. In order to keep costs low, farms employ children at illegal pay rates, for long hours, and under conditions that include the inhalation of pesticides. The employment contracts for these children do not include health benefits. As the word leaks out to the marketplace, pressure is being placed on the worst offenders to change their strategies.

D. Directional StrategiesFive types follow: Concentration strategies focus a company on what it does best in its established markets. Internal growth strategies include market development, product development, innovation, or joint ventures. Mergers and Acquisitions include consolidation within industries and mergers across industries.

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External growth strategies include vertical and horizontal integration as well as diversification. Downsizing most often requires reducing the size of the work force. Table 2.4 lists some of the major company downsizings, while Table 2.5 contains the results of a survey that indicates that only about one-third of the companies that went through downsizings actually achieved their goal to increase productivity. Downsizing presents a number of challenges and opportunities for HRM: careful reduction of the work force, boosting the morale of employees who remain, increasing fresh ideas, and changing the companys culture. 1. Implications for Human ResourcesEach strategy necessitates different HR practices. For example, companies with concentration strategies require the maintenance of current skills. Compensation must therefore focus on retaining skilled employees.

Competing through Globalization: Upjohn and Pharmacia Merger Upjohn and Pharmacia were both pharmaceutical companies that merged in 1995. Both companies were relatively the same size with similar business interests. The merger was supposed to bring size and synergy but ended up bringing heat and headache. Major culture clashes arose because Upjohn is an American company and Pharmacia is a Sweden based company. The merger is not yet a total failure but costs of the merger have exceeded projections by $200 million.

E. Strategy Evaluation and ControlThis is the final component of the strategic management process that includes the monitoring of the effectiveness of strategic choice and implementation. F. The Role of Human Resources in Providing Strategic Competitive Advantage 1. Emergent StrategiesThose that evolve from the grass roots of the organization: that is, what actually is done versus what is planned (see text Figure 2.1). HR plays an important role in facilitating the communication of emergent strategies between levels in the hierarchy. 2. Enhancing Firm CompetitivenessBy developing a rich pool of talent, HR can assure the companys ability to adapt to a dynamic environment. Example: When Compaq Computer was founded, building compact computers that were free of defects was its intended strategy. In 1992, after a difficult period of price competition, Compaqs strategy was changed to being a low-cost producer.

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Related readings from Dushkins Annual Editions: Human Resources 99/00 are: HR Comes of Age by Michael Losey A New Mandate for Human Resources by Dave Ulrich

Competing through High-Performance Work Teams: Motorolas Strategy Uses All Its Resources Motorolas use of high-performance work systems (teamwork, empowerment, training, and education) to move its strategy forward can be seen in the example of its new Harvard, Illinois, location. This site was chosen for a new $100 million plant because of the availability of well-qualified workers. In order to prepare for the future, Motorola is working with the local school district to help develop curricula for the 21st century worker.

G. Strategic Human Resource ExecutivesThe increasing importance of these roles demands new skills. Four basic competencies are illustrated in text Figure 2.6. 1. 2. 3. Business CompetenciesUnderstanding the companys economic and financial capabilities. Professional/Technical KnowledgeIn HR practices such as selection techniques and compensation systems. Change Processes or Organizational Development Techniques The ability to diagnose the need for change and develop and implement the appropriate intervention. Integration CompetenciesA generalist perspective with the skills of a specialist in the above three areas.

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Chapter Vocabulary
These terms are defined in the Extended Chapter Outline section. Strategic Management Strategic Human Resource Management Strategy Formulation Strategy Implementation Mission Goals External Analysis Internal Analysis Strategic Choice

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Administrative Linkage One-Way Linkage Two-Way Linkage Integrative Linkage Job Analysis Job Design Recruitment Selection Training Development Performance Management Pay System Labor and Employee Relations Porters Generic Strategies Cost Leadership Differentiation Role Behaviors Concentration Strategy Internal Growth Strategy External Growth Strategy Downsizing Strategy Evaluation and Control Emergent Strategies

Discussion Questions
1. Pick one of your universitys major sports teams (e.g., football or basketball). How would you characterize the teams generic strategy? How does the composition of the team members (in terms of size, speed, ability, etc.) relate to that strategy? What are the strengths and weaknesses of the team? How do these dictate the teams generic strategy and its approach to a particular game? This question ought to generate some interesting discussion (at least among the men!). Lets use football at the University of Michigan as an example. This teams generic strategy is probably best characterized as a focus strategydevelopment of the ground game. They have a very large offensive line and big, fast running backs. Additionally, they have a large fullback who is able to successfully block for the tailback. Michigans strengths are really the quality of (1) the offensive line and (2) the running backs (speed and size). The primary weakness is the lack of a well-developed passing game, which leaves them in a difficult position when they get behind as time is running out. (Students from schools where the football teams are not undefeated will be able to list a greater variety of weaknesses.) The basic Michigan strategy is to run the football, score points, keep the clock moving, and, with their skilled defense, keep the ball out of their opponents hands. The strengths clearly support this strategy, and yet their weakness limits their options in more difficult games (for example, last seasons three tie games).

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Do you think that it is easier to tie human resources to the strategic management process in large or in small organizations? Why? Most likely, it is easier to integrate HR and the strategic management process in a medium to large organization due to two factors: first, larger organizations tend to have a more formalized approach to strategic planning, while many small firms do not plan; and second, larger firms generally invest time in standardizing or centralizing HR policies and practices. In smaller firms, decisions are made less frequently and may have more of an ad hoc nature.

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Consider some of the organizations you have been affiliated with. What are some examples of human resource practices that were consistent with that organizations strategy? What are examples of practices that were inconsistent with its strategy? Get students to talk about student organizations or former employers. Talk about the different strategies, categorize them, and then discuss the various policies and how they fit.

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How can strategic management within the HR department ensure that HR plays an effective role in the companys strategic management process? By instituting strategic management within the HR department, the department will be forced to review their mission, customers, and so forth. In doing so, it will become evident that for HR to fulfill its mission, the function must take a role in overall corporate planning and implementation.

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What types of specific skills (e.g., knowledge of financial accounting methods) do you think HR professionals will need in order to have the business, professional/technical, management, and integrative competencies necessary in the future? Where can you seek to develop each of these skills? HR professionals will have to have a basic understanding of the various business functions. More specifically, a knowledge of statistics, accounting, information systems, and, obviously, the specific functions of HR are critical to future HR practice. Additionally an in-depth knowledge of organizational change methods will enable an HR executive to take a leadership role in setting the direction of the organization as well as in implementing changes called for by the strategy of choice. These skills can be learned in colleges of business and through experience gained within an organization.

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What are some of the key environmental variables that you see changing in the business world today? What impact will those changes have on the HR function in organizations? Students can list many different general and/or specific changes that will be affecting firms and their HR practices. For example the anticipated national health-care program will result in changes to HR benefit structure and will affect the firm as a new tax. NAFTA will encourage U.S. firms to actively move into both the Mexican and Canadian markets, if they havent already. In some cases, this may mean opening plants in these countries. Both countries have different employment legislation and will therefore require separate HR policies or practices. The changes in demographics in the United States (fewer entry-level workers, less well-educated entry level employees, more older workers, more women, more people of color. etc.) will have many and varied impacts on HR practices. The key is to push students to think about what types of impacts they will hate on HR and how HR can respond in an effective manner

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Web Exercise
The students are asked to go to Allied-Signals home page and answer questions relevant to how a company must integrate HRM into a companys business strategy. www.alliedsignal.com

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End-of-Chapter Case
Unisys Aims for the Top of the Tree Summary With a history of financial debt and a bleak future, Unisys found itself, in 1997, with a new CEO dedicated to turning things around. Increasing financial services and telecommunications are just a couple ways that Unisys hopes to revitalize.

Questions
1. Describe the change in strategy and/or the major strategic thrusts taking place under Lawrence Weinbach at Unisys. Unisys is planning to build the companys service business as well as build up the companys traditional mainframe business. In the service business, Unisys is going to focus on key markets that the company has expertise in: publishing and transportation. 2. What are the implications of these strategic business issues for people issues (culture, competencies, critical behaviors, etc.)? Unisys is trying to boost morale throughout the company. Unisys University will be new aspect of the company offering a technical and management-training program. Unisys will offer stock at discounts to employees and will also offer new 401k plans. 3. How can HR play a role in executing this strategy? Given the changes being implemented at Unisys, HR should spend time with employees explaining the change, how it is going to affect them, and help them through the change. HR, through effective communication, can play a critical role in successful execution of strategy.

Additional Activities
Teaching Suggestions Students who have not yet had a course in business strategy will find this material challenging and new. Therefore, any exercises that ask the student to identify various strategies and discuss HRM implications should be helpful. Following are suggestions of activities that provide this type of learning activity. The HBR case, People Express, can be used in a whole class period, most effectively in small group discussion initially. The Frost, Inc. case is simpler and could be given as homework assignment and then used in class discussion. An outside speaker is suggested, if the time and person is available. 1. Harvard Business School Case 9-490-012, People Express Airlines: Rise and Decline by M. Beer, Teaching Note 5-491-080 by Beer. (Two case supplements have also been developed: People Express Supplement, 9-487-054. by C. Heckscher, and People Express, Update January 1989, 9-489-022, by D. Q. Mills and G. B. Friesen.) This case describes the innovative approach to organizing and managing employees by People Express and describes the companys eventual demise. This material can be used to inform about leading-edge human resource practices and to raise questions about what went wrong with the organization. Two videotapes (9-890-507 and 9-890-508) are available as well.
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Suggested Questions for People Express 1. How did People Express business strategy relate to its HR strategy? Was the business strategy always closely linked to the HR strategy? 2. Would the People Express HR system remained effective if it had chosen to remain in the low-density routes dominated by local and regional carriers? Why? What aspects of the People Express HR system needed to be modified if it was going to successfully compete with the major carriers? 3. What factors do you believe were most responsible for the success of People Express from 1981 to 1985? In comparison to other factors, how important was the management of human resources for People Expresss success between 1981 and 1985? 2. The following case describes an organizations attempt to modify its strategy and problems that result from the attempted change. Questions for students to discuss or respond to in writing follow the case. Frost, Inc. (Raymond Noe, Michigan State University) Frost, Inc. is a manufacturer of overhead conveyor trolleys, used primarily in the auto industry with sales of $20 million. Frost is located in Grand Rapids, Michigan. Concerned about depending too heavily on one cyclical industry, Frosts president made several attempts to diversify the business. The attempts to move into manufacturing lawn mower components and material handling systems, such as floor conveyors and hoists, failed. The engineers did not know how to design unfamiliar components, production people did not know how to make them, and sales people did not know how to sell them. The president diagnosed the problem as inflexibility (We have single-purpose machines and single-purpose people, including single-purpose managers.). He decided that automating production was the key to flexibility. Twenty-six old-fashioned screw machines on the factory floor were replaced with 11 computer numerically controlled machines and 18 robots. He decided to build an automated store and retrieval inventory-control system and to completely automate the front office to reduce indirect labor costs. He did not plan to approve additional hires as a result of the automation. Questions 1. What directional strategy was Frost pursuing? Frost initially pursued a concentration strategy and then changed to an external-growth strategydiversification. 2. What HR practices should be in place to support this strategy? In order to successfully pursue a strategy of diversification, people with the needed skills must be hired or developed. Therefore, as the company moved into a new area, engineers with experience in lawn mower components, etc., would need to be hired, or current employees would need to be provided with training. In this case, the CEO had

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decided that no new hiring would take place. Therefore, the emphasis should be on the provision of training for new skills. To support the engineers and production people in this development effort, a skill-based compensation program along with profit-sharing would be useful. 3. What types of information should the HR function provide to support the new strategy? One of the unstated problems in this case may be with employee attitudes toward the change, given that it appears that they did not participate in the strategic choice. A survey of attitudes may be useful. Secondly, a survey of employee skills and experience would help make staffing and training decisions more effective. While automation may resolve some production problems, it doesnt solve the design engineering issues. Additionally, even with automated lines, people must be available who have the skills to monitor production activity and who can maintain and repair the equipment. Once again, HR could provide the human side of the automation process so that planning for the change process would include all necessary elements for a successful corporate culture change. With the need for higher skills and potentially for team organization, the HRM function would need to determine the aspects of the organizations practices that no longer fit the new technology and structure of the firm. (See the following reference: Frost Inc.Technological Renewal and Human Resource Management: A Case Study, Steven P. Galante, Human Resource Planning 10, no. 1, pp. 57-66.) 3. Outside Speaker: An outside speaker for this chapter could be used very effectively. Identify an HRM or organizational development practitioner who has recently participated in the implementation of a TQM or other quality processor any kind of organizational restructuring. Ask this individual to describe the precipitating events leading up to the change and the people issues that were visible during the implementation. Business literature is filled with examples of businesses that are reevaluating their strategies and making significant changes. Ask students to review recent issues of Business Week or Fortune and to bring in an example that they can discuss in groups or share with the class as a whole. It may be that these examples will readily fall into strategic categories that can then be used to reinforce the chapter concepts. 4. Questions for Competing Through Globalization a. What HRM practices could have been used to make the merger transition smoother and more successful? b. Do you think the Upjohn-Pharmacia merger will eventually be successful? Why or why not? Questions for Competing Through Meeting Stakeholders Needs a. Inexpensive, child labor is one way to cut costs. Identify legal and ethical strategies that the farms could use to cut costs. Questions for Competing Through High-Performance Work Teams a. Give examples of Motorolas use of high-performance work teams. b. Identify and compare Motorolas emergent and intended strategies.

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